What are Direct And Indirect Taxes? - Explained with Examples

The citizens of every country are liable to pay tax under some rules and regulations. There is no exemption for the tax if the people of that country are using services and availing the facilities. The time and the person you pay the tax may vary, but the tax you pay always goes to the government's pocket. In return, the government spends it developing the country, such as building schools, hospitals, roads, etc. The government also uses this tax received to pay the government employees and workers.

The government doesn't need to ask the citizen to pay tax when they need money; instead, they sometimes do it to control product consumption. For instance, when there is no tax on the products, there are higher chances that a single person buys that product in bulk. The tax on the products limits the purchase rate so that the product is available for the other person to use.

We will discuss the two types of tax in detail in the paragraphs below.

What are indirect taxes?

The person paying the tax is not familiar that he/she is paying the tax. The taxpayer does not directly pay these taxes. Instead, a middle entity is the receiver of the tax and submits the tax to the government. The tax applies to the people availing of certain services and purchasing or importing certain products.

Below are some of the types and advantages of indirect taxes.

Advantages of indirect taxes:

1. Every individual contributes

Unlike a direct tax, indirect tax involves every citizen paying the tax in a minimum amount. The indirect tax rates vary from product to product. Every individual who is not familiar that they are paying the tax will contribute to pay it.

2. Product control

The indirect tax helps in controlling the product purchase. Adding an extra amount to the product's total price will restrict them from buying in bulk, and the chances of product unavailability will be lower.

3. Hidden tax

The payers are not familiar with paying the tax, so any tax rate variation does not aggravate the payers compared to the direct taxpayers.

Examples and types of indirect taxes

1. Sales tax

People pay a certain amount for purchasing clothes, food items, and other utilities when they visit a store. This tax paid by the people is known as the sales tax. It is a one-time tax, unlike VAT tax.

2. Custom tax

The custom tax applies to the products and services that are not your county's production. Imported products apply to the customs tax, and these taxes have higher rates than others.

3. VAT tax

Usually, people mix the VAT tax and sales tax, but these two are different. Sales tax is a one-time collection, and VAT is applicable at every point of product development. From raw material to the final product, different entities collect the VAT tax.

Hire the best VAT consultancy in Dubai to approach better tax services and identify the VAT tax applicable to your organization or business.

What are direct taxes?

Direct taxes are the taxes that a person submits directly to the government without including any third person. Direct taxes apply to a person's property, assets and money. A person possessing a certain amount and property is bound to pay tax according to rules defined by the law. The amount of tax to pay depends on the ability of the taxpayer. The higher the paying ability of the taxpayer higher the tax amount.

Advantages of direct taxes:

1. No unfair situation

Direct tax is all about the payers' ability. It helps implement equity people who have a higher tendency to pay the tax are made to pay more than the people who have a low tendency. A person's income is obvious, and one can investigate a person's income, so there are no chances that a person can exempt from paying tax and make the poor pay.

2. Changes according to the government's need

One of the main benefits of direct tax is that the government can fluctuate the tax rate. There are certain situations, and to balance the country's economic condition, the government has to take its citizen's help. In such a situation, the government can increase or decrease the rate of tax.

3. Development of the country

Making the rich people of the country pay and investing that amount to better the poor's life can help develop the country. Taxes received are useful to spend on the development activities of the nation.

Examples and types of direct taxes:

1. Income tax

Depending upon a person's income in a month, the government deducts a certain tax amount from the salary. Some people are liable to pay, and some people are not, such as the workers whose salaries are not higher.

2. Wealth tax

Wealth asset is also known as capital tax. The government asks for a certain amount of tax from the person depending upon his assets' worth. The assets may be the building or house that person owns, the number of cars, and other income and savings sources.

3. Corporation tax

Corporate tax refers to the tax that an organization has to pay at the end of the year. According to the sales within that year or the total income or profit in a specific year.

4. Transfer tax

The tax applicable to real estate activities is called the transfer tax. The person transferring his/her property to another person must pay a certain amount of tax to the government depending upon the property's worth.

Is your organization bound to pay tax?

Based on your services and the income of your organization. It is bound to pay tax to the government. Not paying the tax on time will cause many difficulties and problems for your organization. To deal with the tax payment services, you can consult professionals to avoid any tax-related issues in the future.